U.S. Dollar Crashes
to Three-Year Low Amid Tariff Uncertainty
By the Curmudgeon with Victor
Sperandeo
Introduction and
Overview:
It’s not supposed to be like this! Trump’s tariff trauma,
chaos and the ensuing sharp financial market declines should be strengthening
the U.S. dollar -- the world’s reserve currency-- in a flight to safety. Geopolitical and economic uncertainties
globally tend to increase the demand for safe-haven currencies like the U.S.
dollar. Yet the dollar not only failed to strengthen during the post April 2nd
all-asset (x-Gold) meltdowns, but it also fell
sharply, puzzling economists, foreign holders of (unhedged) U.S. assets,
and hurting consumers.
Most economists believed the dollar would strengthen for several reasons:
1.
Tariffs are a tax, which would
reduce demand for more expensive foreign products thus lowering demand for
foreign currencies, and consequently, strengthening the dollar.
2.
The tariffs were expected to
be inflationary, potentially leading to higher bond yields and fewer rate cuts
by the Federal Reserve Board. U.S. interest rates higher than foreign rates
would attract more investment into dollar-denominated assets, strengthening the
dollar.
3.
Finally, Trump
administration policies aimed at boosting domestic manufacturing and
deregulation could also contribute to a stronger dollar. What a shocker!
Here are
the cold, cruel statistics:
·
The dollar lost more than 5%
against the euro and pound, and 6% against the yen since early April.
·
Foreign funds sold $10.7
billion in U.S. stocks between April 3rd (first day of trading after
Trump’s “Liberation Day” announcement) and April 9th (when Trump
announced a 90-day pause on some tariffs). U.S.-based funds were net buyers of
$37.5 billion in U.S. stocks in that period.
·
Foreign funds sold an
estimated $14.2 billion from U.S. Treasuries and corporate bonds in the two
weeks ending April 16. In the same period, U.S.-based funds had outflows
of $11.4 billion from U.S. fixed income.
·
Since mid-January, the dollar
has fallen 9 to 10% against ICE U.S.
Dollar Index (DXY). That’s a rare and steep decline to its lowest level in
three years and the worst start to a year in the index’s four-decade trading
history.
Here’s the DXY 2025 YTD chart:
·
The trend of U.S. bond sales
from China, Japan and other countries is likely to continue to put downward
pressure on the dollar as will foreign investors who have been selling U.S.
stocks and other dollar assets this year.
·
European interest rates have
come down substantially since April 2nd, while U.S. intermediate and
long-term rates have risen. Interest rate differentials widened which should’ve
favored the dollar as a higher yielding fixed income investment.
·
For example, the German
10-Year Bund rate fell from 2.8826% to 2.463% while the U.S. 10-Year Treasury
Note rate INCREASED from 4.03% to 4.34% currently. Therefore, the interest rate difference
between the 10-Year T-Note and the 10-Year Bund has increased to approximately 1.88 percentage points (4.34% - 2.46%).
Negative Implications of
the Declining Dollar:
Now the price of French wine, Japanese cars and parts, South
Korean electronics (e.g. Samsung, LG, SK Hynix, etc.) and a host of other
imports will cost a lot more - not only due to tariffs but also to a weaker
currency.
The sharp dollar decline could also hit U.S. consumers in higher
interest rates for mortgages and car financing deals as lenders demand higher
interest rates for the added risk.
More worrisome is possible higher interest rates on the
ballooning U.S. federal debt, which is
already at a very risky 120% of U.S. annual economic output (GDP). Federal interest expenses have already
eclipsed both Medicare and military spending and are headed higher unless the
dollar stabilizes.
Debt financing costs are invincible - they can’t be cut by
DOGE, Congress or any government agency.
Sorry President Trump, no Executive Orders will be possible!
“Most countries with that debt to GDP would cause a major
crisis and the only reason we get away with it is that the world needs dollars
to trade with,” said Benn Steil, an economist at the Council on Foreign
Relations.
…………………………………………………………………………………………………………………………………
Importance of the U.S.
Dollar for Consumers and the Markets:
The U.S. dollar’s dominance in cross-border trade and as a safe haven has been nurtured by administrations of both
parties for decades, because it helps keep U.S. borrowing costs down and allows
Washington to project power abroad — enormous advantages that could possibly
disappear if faith in the U.S. was damaged.
The dollar's special status as the global currency king dates back to 1944,
giving America extra perks worldwide, according to the Council on Foreign Relations. Central banks worldwide stash nearly
60% of their reserves in dollars. Every major commodity—from oil to soybeans to
computer chips—trades in dollars, allowing America to borrow cheaply and
leverage its diplomatic power by controlling access to financial markets
trading in dollars.
Economists critical of Trump’s April 2nd “Liberation
Day” tariff announcement recall another event, the Suez Crisis of 1956, that broke the back of the British Pound Sterling. The military
attack on Egypt was poorly planned and badly executed and exposed British
political incompetence that sank trust in the UK. The Pound fell sharply, and
its centuries-long position as the dominant trading and reserve currency
crumbled.
UC Berkeley Economics Professor Barry Eichengreen
says Liberation Day (April 2nd), could be remembered as a similar
turning point if the president isn’t careful. “This is the first step down a
slippery slope where international confidence in the U.S. dollar is lost.”
“Global trust and reliance on the dollar was
built up over a half century or more. But it can be lost in the blink of an eye,”
he added. That seems to be happening now!
Curmudgeon Opinions:
One would think U.S. Treasury Secretary Scott
Bessent, a currency expert [1.] and former hedge fund
manager, would be aware of the dangers posed by the dollar’s decline and
convince Trump to moderate his universal tariffs and vicious trade war against
China. But that has not happened. No
actions have been taken by the U.S. administration to stop the dollar’s rapid
decline (see Victor’s comments below).
……………………………………………………………………………………………………………………………….
Note 1. Bessent
was a leading member of the Soros Fund Management team whose bet on the
1992 Black Wednesday collapse of the British pound garnered over $1 billion for
the firm. His bet against the Japanese yen in 2013 brought additional profit.
……………………………………………………………………………………………………………………………….
It’s also a mystery why billionaire U.S. Commerce Secretary Howard Lutnick is not
concerned that 145% tariffs on China exports will kill U.S. big tech companies
(like Apple, Google, Amazon, Microsoft, Facebook, etc.) whose supply chains are
mostly in China and Taiwan. That’s not only for semiconductors and smartphones,
but also for the powerful computer servers and other IT equipment used by the
cloud hyper-scalers.
On Sunday, April 13th Lutnick said that the
administration's decision Friday night April 11th to exempt a range
of electronic devices from tariffs implemented earlier this month was only a
temporary reprieve. The Commerce Secretary
announced that those items would be subject to "semiconductor
tariffs" that will likely come in "a month or two."
"All those products are going to come under
semiconductors, and they're going to have a special focus type of tariff to
make sure that those products get re-shored. We need to have semiconductors, we
need to have chips, and we need to have flat panels -- we need to have these things made in America (???). We can't be
reliant on Southeast Asia for all the things that operate for us," Lutnick
told "This
Week."
à It is INCREDIBLY
NAÏVE to believe that U.S. high tech manufacturing can be rebuilt after
they’ve been increasingly off shored for the last 25 years. The U.S. does not have the required
infrastructure or skilled low-cost labor that would make that possible anytime
soon and certainly NOT during Trump’s 2nd term of office.
Non-Dollar Alternatives
for Global Trade:
China has been striking yuan-only trading deals with Brazil
for agricultural products, Russia for oil and South Korea for other goods for
years. It has also been making loans in yuan to central banks desperate for
cash in Argentina, Pakistan and other countries, replacing the dollar as the
emergency funder of last resort.
For years, there’s been talk of a BRICS currency, but that
hasn’t happened in any way, shape or form.
Victor speculated on that topic in this
post, but there's been no official move towards creating it.
Victor’s Comments:
A few points of order … the dollar will not be replaced as the
world reserve currency, because nothing else can replace it. That’s due to the
depth of the U.S. debt markets, trading liquidity, and open borders. However,
the dollar will decline at times - always due to fundamental factors that are
usually not known or misinterpreted.
The Main Street Media (MSM)
is the absolute worst place to find out the reality and truth of the cause of
events. You must do it on your own or find independent resources of information
that you trust and have shown to be correct in the past (like the Curmudgeon/Sperandeo
blog posts).
The dollar is now in a steep downtrend and is not a place for
foreigners to park money as a safe haven. Why? The main reason is Trump’s policies on
“investments” and China are being turned upside down. In effect, the Trump administration is now
saying to China:
“Take your money out of the U.S. Your Investments in the U.S.
are not welcome, under your designs and political goals, which are
anti-America.”
Please read the “America First Policy Investment Memo of 2/21/25”
for a more definitive answer. That memo
provides the critical reason for the trade war with China and why the dollar is
falling and will continue down.
“Investment at all costs
is not always in the national interest, however. Certain foreign
adversaries, including the People’s Republic of China (PRC),
systematically direct and facilitate investment in United States companies and
assets to obtain cutting-edge technologies, intellectual property, and leverage
in strategic industries. The PRC pursues these strategies in diverse
ways, both visible and concealed, and often through partner companies or
investment funds in third countries.”
A lower dollar is conducive with Trump’s policy of lowering
the U.S. trade deficit by making U.S. goods cheaper! I am guessing that the 90-price
level on the DXY is the desired target. This will be achieved slowly and
surely over time. It also will come from lower U.S. interest rates.
A tariff is a tax. Taxes are not included in the CPI! It usually is a one-time event,
and some prices don’t rise if the manufacturer can absorb it. Prices rise for
all kinds of reasons (that have nothing to do with inflation e.g. printing
paper fiat currency). A recent example is the egg shortage due to Bird Flu
killing 20 million hens.
What if Trump Fires Fed
Chair Powell?
Trump has also repeatedly threatened to chip away at the
independence of the Federal Reserve, raising fears that he will force interest
rates lower to boost the economy even if doing so risks stoking runaway
inflation. That is a sure-fire way to get people to flee the dollar. After Fed
Chair Jerome Powell said Wednesday that he would wait to make any rate moves,
Trump blasted him, saying “Powell’s termination cannot come fast enough!”
Democratic Sen. Elizabeth Warren, a frequent critic of
Powell, said during an interview on CNBC that firing the Fed chair could cause
U.S. markets to crash.
Steve Sosnick, chief strategist at Interactive Brokers, said
any decision that compromises the independence of the Fed could deter foreign
investors from investing in U.S. markets.
“I believe that we underestimate how important many of our institutions
are to international investors. Those include a nonpartisan judiciary and a
central bank that is immune to political meddling,” Sosnick said.
“There’s already a concern that foreigners have been
retreating from our stock and bond markets, and this certainly won’t do
anything to assuage those concerns,” he added.
Victor’s Opinion: The war with Fed Chair Powell will be won by
Trump as he controls the bully pulpit, and six of the seven institutions of
U.S. government power (the House, Senate, the Supreme Court, the States
(aggregate of Governors) and the aggregate of legislatures.
However, Trump does not control The Fed! He legally
cannot fire Powell, but he can apply so much political pressure on the Fed that
Powell will resign. Think about the Speaker of the House calling for the repeal
of the 1913 Federal Reserve Act? The
ammo Trump has is global central banks are lowering rates (the ECB cut rates to
2,25% for the 7th cut in a row). The 2-year Treasury Note, which tracks the Fed
Funds rate most of the time is 3.81% while Fed Funds are 4.4%? The 10-year
yield is even lower at 4.34%. The markets seem to agree with Trump that U.S.
short term rates will soon be lower.
If Trump gets his way with tariff negotiations it is possible
(but not probable) that prices in America will decline, as tariffs could come
down from 20% in the Euro Zone and Japan to zero. This is unknown and could go
either way.
…………………………………………………………………………………………………
Conclusions:
Trump’s erratic, unpredictability makes the U.S. seem less stable,
less reliable, and a less safe place for their money.
Trump says U.S. tariffs will drive down trade deficits, which
he cites as evidence that countries are “ripping off” America. But in
calculating the tariffs, he looked at trade deficits only in goods, not
services in which the U.S. excels. Most economists think trade deficits are not
a sign of national weakness anyway because they do nothing to impede economic
growth and prosperity. Also, countries
hit with tariffs will reciprocate as China already has done.
There seems to be a huge
contradiction in the U.S. Memo
Victor referenced above:
“Section 1. Principles and Objectives. America’s investment policy is critical to
our national and economic security.
Welcoming foreign investment and strengthening the United States’
world-leading private and public capital markets will be a key part of
America’s Golden Age.”
-->The U.S. imposed tariffs and falling dollar are
certainly discouraging - NOT encouraging - foreign investments. Financial asset
meltdowns due to great U.S. government policy uncertainty are weakening - not
strengthening - U.S. private and public capital markets. It’s
all convoluted and super scary!
Athanasios Vamvakidis, global head of G-10 foreign exchange
strategy at Bank of America said if there is a favorable turn in U.S. policies,
the dollar could benefit.
“But I don’t think we go back to where we were because I
think the rest of the world has crossed
a red line, and they will try to reduce dependence on the U.S. on trade, on
defense and everything. There’s no way back,” he said.
“The status of the dollar as the world’s premier reserve
currency is being questioned because of the policy decisions of the Trump
administration. Following so-called Liberation Day on April 2nd, the
chaotic rollout of President Donald Trump’s tariff policy has resulted in
declines in the dollar and prices of longer-term U.S. government securities in
tandem with declines in risky assets such as stocks—a reaction contrary to the currency’s and Treasuries’ usual performance as safe havens
during episodes of market volatility.”
“To paraphrase F. Scott Fitzgerald (The
Great Gatsby), we are careless people, willing to smash things up,
including the status of the dollar.
News Flash:
Donald Trump’s economic approval rating has plummeted ever
since imposing tariffs. A CNBC
survey released Saturday shows 55% of Americans disapprove of his
handling of the economy, the lowest point it’s been during both his first and
second term as U.S. President. That’s
the first time in any CNBC poll Trump’s approval has been net negative on the
economy.
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End Quote:
Always keep in mind the trading words of legendary investor George Soros:
“Economic history is a never-ending series of episodes based
on falsehoods and lies -NOT TRUTHS! It represents the path to big profits. The
object is to recognize the trend, whose premise is false, ride that trend and
step off before it is discredited.”
…………………………………………………………………………………………………………………………….
Stay calm (easier said than
done), be well, success and good luck. Till next time…
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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